Tribune Co. (TRBAA:US), publisher of the Los Angeles Times, Chicago Tribune and Baltimore Sun, plans to spin off its newspapers into a separate business, letting the company focus on its more lucrative local television stations.
The proposal, announced today, would create a newspaper company called Tribune Publishing Co. and a TV business named Tribune Co. with 42 stations in 33 markets, mimicking the breakup of News Corp. in June. The move follows Tribune’s $2.73 billion deal to buy 19 stations this month from Local TV Holdings LLC in the industry’s biggest transaction in six years.
In spinning off the newspaper business, Tribune is backing away from seeking an immediate bidder for the operation. The company, which emerged from bankruptcy at the end of 2012, had hired advisers to evaluate interest from buyers, according to people familiar with the process. Tribune’s publishing group was valued at about $623 million in its bankruptcy filings last year, $300 million lower than a January 2011 estimate.
“Publishing is declining -- you can see it in the numbers,” said Matt Kaplan, an analyst at Imperial Capital LLC in Los Angeles. Though newspapers are helping shore up revenue by charging for Web access, they haven’t held up as well as television stations in the Internet era, he said. “People still watch local TV for news.”
The spinoff proposal doesn’t preclude Tribune from selling some or all of its newspapers before the transaction closes, said a person with direct knowledge of the company’s thinking. A buyer willing to pay a premium for one or more of the papers could still negotiate a deal, said the person, who asked not to be identified because the deliberations are private. Even so, the taxes on an outright sale of the publications make such a deal less attractive, the person said. The spinoff, in contrast, would be tax-free to its current shareholders, the company said.
Because it was considering a spinoff early on, Tribune never entered into any negotiations with potential buyers and didn’t open up its financial books to interested parties, said the person.
Gary Weitman, a spokesman for Chicago-based Tribune, declined to comment on the company’s spinoff strategy.
The proposed sale of Tribune’s newspapers drew protests in May from union organizations, which were concerned that the business would be sold to Koch Industries, a closely held company controlled by the billionaire Republican donors Charles and David Koch. Koch Industries had been cited among several potential buyers -- a group that included News Corp., Berkshire Hathaway Inc., Wrapports LLC and Freedom Communications Inc., people familiar with the negotiations said in March.
Tribune Chief Executive Officer Peter Liguori said in a memo to employees in May that the company had received “a great deal of unsolicited interest in our publishing businesses, which says a lot about the strength of our brands.”
Berkshire Hathaway CEO Warren Buffett, who has spent more than $340 million acquiring community newspapers, told Tribune’s Allentown Morning Call that he might be interested in buying that publication.
News Corp., meanwhile, is in a position to make its own newspaper acquisitions following its spinoff from the rest of Rupert Murdoch’s media empire. The publishing company, which retained the News Corp. name, was given a war chest of $2.6 billion in cash at the time of the split last month to help foster the business.
Murdoch has expressed interest in the Los Angeles Times, people familiar with matter said earlier this year. The publication would add coverage of the entertainment business to a stable of papers that includes the Wall Street Journal, the New York Post and the U.K.’s Sun.
Belo Corp., which owned the Dallas Morning News and other publications, is another company that cut its ties to the newspaper industry. The company spun off its papers as A.H. Belo Corp. in 2008 to let it focus on television. Gannett Co., publisher of USA Today, agreed to buy Belo last month as part of its own efforts to shore up its TV holdings.
Tribune expects to spend the next nine to 12 months developing its separation plan for the board. When the transaction is completed, each business will have its own management and directors. Shares in the newspaper business will be distributed to investors.
“Moving to separate our publishing and broadcasting assets into two distinct companies will bring single-minded attention to the journalistic standards, advertising partnerships and digital prospects of our iconic newspapers, while also enabling us to take advantage of the operational and strategic opportunities created by the significant scale we are building in broadcasting,” Liguori, a former executive at the Fox network, said in a statement today.
The Local TV deal this month will put Tribune in a better position to seek higher licensing fees from cable companies such as Comcast Corp. and Time Warner Cable Inc. (TWC:US), which purchase the rights to air local broadcasts. The company also owns superstation WGN America and Tribune Studios, as well as investments in real estate and websites such as CareerBuilder.
“The best way to actually create value for shareholders is moving away from the publishing because it dilutes some valuation that the broadcasting business would get,” said Hamed Khorsand, an analyst at BWS Financial in Woodland Hills, California. “It also gives them a vehicle where they can separate the pension liability that’s still on the balance sheet because of the publishing business.”
While sales at the newspaper unit are shrinking, it’s a profitable business and boasts some of the highest-profile publications in the U.S. In addition to the Los Angeles Times and the Chicago Tribune, its holdings include the Sun Sentinel, Orlando Sentinel, Hartford Courant and Daily Press.
Tribune’s publishing segment posted $46.4 million in operating profit in the first quarter. The business’s revenue declined 3.2 percent to $465.9 million.
“Pursuing the separation of our publishing and broadcasting businesses will also allow us to maintain flexibility as we continue considering all our strategic alternatives for maximizing shareholder value,” Liguori said in a separate memo to employees today.
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